Economic Insights

Economic Insights covers topics that may ultimately have an impact on commercial real estate conditions including the labor market, population trends, monetary policy announcements from the Federal Reserve and national budgetary issues.

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Office Employment Softens, but that Won’t Dissuade the Fed from a March Hike

March 10, 2017

Janet Yellen’s comments early in March had suggested that a 25 bps increase in the Fed Funds rate to 0.75% - 1.00% was all but certain next week, and today’s report will do little to dissuade the Committee that the labor market has strengthened sufficiently to remove further policy accommodation.

November’s nonfarm payroll report, which modestly missed expectations, showed a few surprises. Total nonfarm jobs rose by 178,000 versus consensus for a gain of 180,000 jobs, but job growth in the private sector fell a little short, rising by 156,000. Over the past three months, private non-farm payroll growth has slowed to an average of 165,000 (September – November) versus the prior three months’ average of 197,000 (June – August.) Revisions to the prior two months reduced private employment gains by 17,000 on a combined basis.

The Beige Book report for November, which summarizes comments received from businesses and other contacts outside the Federal Reserve, suggested that economic activity during the most recent period “continued to expand” with most districts noting “modest” or “moderate” growth.

September’s nonfarm payroll report, while modestly below expectations, was in line with data from recent months. Total nonfarm jobs rose by 156,000 versus a consensus for a gain of 172,000 jobs. Excluding government workers, payrolls rose by 167,000. Revisions to the prior two months reduced employment gains in July and August by 7,000 on a combined basis.

The Federal Open Market Committee voted to hold the target range for the Federal Funds rate at 0.25% to 0.50%, although three dissenters voiced support for a rate hike today. In a dovish statement, while the Committee judged that “the case for an increase in the federal funds rates [had] strengthened” and that “near-term risks to the economic outlook appear roughly balanced,” the Committee ultimately “decided…to wait for the further evidence of continued progress toward its objectives.”

August’s nonfarm payroll report was somewhat soft, with the headline figure showing a gain of 151,000 jobs versus consensus for an increase of 180,000 jobs. Excluding government workers, payrolls rose by 126,000. The change in total nonfarm payroll employment for June was revised down from +292,000 to +271,000, while the change for July was revised up from +255,000 to +275,000; on balance, employment gains in June and July combined were 1,000 less than previously reported.

July’s nonfarm payroll report exceeded expectations, handily topping estimates with a gain of 255,000 jobs overall and 217,000 jobs in the private sector. Office employment rose by a robust 88,000 as well (Table 1 and Chart 1 on the following page), led by strength in professional and business services, where almost 1/3 of the advance stemmed from job gains in accounting and bookkeeping services, architectural and engineering services and computer systems design. At least for now, recent data suggest the labor market is firing on all cylinders: the average monthly gain in office-using payrolls over June and July equals 99,000—more than twice as much as the 42,500 average monthly gain over April and May.

The Beige Book report for July, which summarizes comments received from businesses and other contacts outside the Federal Reserve, suggested that economic growth during the most recent period was “modest.” However, unlike prior months, no District described growth as slowing or flat. Just two Districts noted any impact from the Brexit vote; Boston suggested that while Brexit presented downside risks to aggregate economic growth, those with direct exposure “did not expect severe negative impacts on their own firms' outcomes” while Dallas noted as with the upcoming presidential election, Brexit served as a source of overall uncertainty.

June’s nonfarm payroll report produced a welcome sigh of relief. Despite employment figures for May that were even weaker than initially reported, June’s report showed a healthy gain of 287,000 workers overall, and a 265,000 gain in the private sector. While some of the headline figure’s strength reflected a rebound in information sector hiring as striking Verizon employees returned to work (a +28,100 advance in telecommunications payrolls in June almost offset a 32,000 loss in May), the composition of payrolls in the office-using segment suggests some degree of slowing.

The Federal Open Market Committee voted unanimously to hold the target range for the Federal Funds rate at 0.25% to 0.50%. In its press release, the FOMC referenced the less-than-stellar May payrolls figure, noting a slower pace of improvement in the labor market as well as “diminished” job gains even as growth in economic activity “picked up.” While the drag from net exports appeared to “have lessened,” the statement continued to highlight “soft” business fixed investment.

Yes, the minutes from April suggested that “most” participants were ready for a June rate hike contingent on strengthening labor market conditions and inflation “progressing” toward two percent, but May’s payroll report and the outcome of the referendum in the U.K. seem to have dampened prospects not only for a rate hike in H2 2016, but also for any hike in H1 2017. Here are some take-aways from the June meeting, but because 1) it was conducted a week prior to the Brexit vote and 2) the new economic growth projections were released immediately following the meeting’s conclusion on June 15th, the minutes are perhaps a bit less relevant than usual.